Higher Cost Ratio Burden Can Be Minimized
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
IS Dongseo’s annual OP this year is primed to exceed the level seen in 2018 (when sales of the Yongho-dong W project were reflected). Considering the anticipated scale and profitability of in-house projects to be conducted, OP should continue to expand going forward.
OP growth to exceed 2018 level
We maintain a Buy rating and a TP of W70,000 on IS Dongseo, pointing out: 1) the booking this year of pre-sales for major in-house project sites; and 2) likely additional profit momentum from 1H22 pre-sales for the DMC IS BIZ Tower Central in Goyang. We calculate our TP of W70,000 by applying: 1) an EV/EBITDA of 5.0x applied for the company’s construction business; 2) the value of stakes in subsidiaries, including Insun ENT; and 3) the land value of the firm’s holdings in Goyang Deokeun District and Gyeongsan Jungsan District.
We forecast 2022 OP of W383.2bn (+23% y-y), helped by the expected booking of sales this year for Anyang IS BIZ Tower Central (W450bn), a highly profitable in-house business site, and DMC Eileen’s Garden (W140bn) in Goyang Deokeun. A notable difference from 2018 is that after the booking of sales for the Yongho-dong W project at that time, there was a sales vacuum due to preparations for the acquisitions of stakes in environmental players such as Insun ENT. However, 2022 should feature pre-sales from in-house projects Goyang Deokeun (more than W1.5tn) and Gyeongsan Jungsan district (more than W2.5tn).
Higher cost ratio burden unavoidable, but can be minimized
A negative issue facing the construction industry in 1H22 is burden from rising cost-to-sales ratios stemming from both a surge in building material prices and rising numbers of unsold housing units in several local areas. The nature of the industry means that IS Dongseo cannot be free of this issue. That said, we point out that its portion of in-house business sales should rise from 38% in 2022 to 55% in 2024, in turn somewhat offsetting the higher cost burden issue. And, concerns over unsold homes in the local real estate market look modest. In general, we believe that the profitability of in-house projects should be looked at together with pre-sale subscription ratios and the time of land purchase for each individual project. IS Dongseo is known to have purchased the building sites for its in-house projects (Goyang Deok-eun, Gyeongsan Jungshin, Ulsan New City, etc) at highly reasonable prices, so healthy profits from these sites are likely.